California home sales volume lays low

36,600 new and resale home transactions closed escrow in California during March 2019. The number of homes sold was 12% lower than a year earlier, amounting to 4,900 fewer sales in the single month of March. This continues the trend of falling year-over-year sales volume, which began in the second half of 2018.

2018 ended with 442,000 home sales in California. This was 19,900 fewer sales than took place in 2017, amounting to a decrease of 4.3%. For perspective, 2018’s 442,000 homes sales volume was 41% below peak sales volume experienced in 2005. 2019 year-to-date home sales are 11% below 2018 as of February 2019.

Home sales will continue to decrease throughout 2019, slowing the flow of agent fees. Rapidly rising prices and interest rates in 2018, along with uncertainty brought on by shifting economic policies, have discouraged potential homebuyers and derailed sales. Therefore, home sales volume won’t rise significantly until after home prices bottom with the next recession, expected in 2020-2021.

Updated May 2, 2019. Original copy posted March 2009.

Chart 1

Chart update 05/02/19

Mar 2019

Feb 2019

Mar 2018

Southern CA

18,000

13,500

20,900

Northern CA

16,700

12,600

18,700

CA Total

34,600

26,100

39,600

The above chart tracks the home sales volume of single family residences (SFRs) on a month-to-month basis. Sales volume includes the sale of all residential resales and new homes in California, including new homes sold directly by builders.

Home sales vary from month-to-month for a variety of reasons, most significant being homebuyer demand. This demand is influenced by several factors constantly at work in California’s homebuying market, including:

Seasonal differences in annual sales volume

It’s normal for home sales volume to rise in the first half of the year and fall after June, generally speaking.

Chart 2

Chart update 02/02/19

Chart 2 shows average home sales as experienced from 2011-2018. As depicted, the most homes are regularly sold each year in June. Another small increase takes place in December, as homebuyers seek to wrap up their financial activities before the end of the year.

Therefore, real estate professionals are not to worry when they hear of falling sales volume in the latter half of the year. This is a normal seasonal progression. What to watch for is year-over sales comparing a month or other period (such as year-to-date) this year with the same month or period last year.

A very long recovery for home sales volume

Annual real estate sales numbers since the Great Recession of 2008 suggest the upcoming years through 2017 will be characterized by the same continuing bumpy plateau in home sales volume we have experienced now for eight stagnating years. As a rule, current market action, whether up or down, is reflected first in sales volume, followed by prices, and both fluctuate from month to month mostly going in opposite directions or just standing still.

Chart 3

Chart update 02/02/19

2018

2017

2016

2005 peak

NorCal

211,500

213,900

213,900

398,200

SoCal

230,400

248,000

244,200

355,700

Total

442,000

461,900

457,900

753,900

To set the stage for a forward look, a review of sales volume in the recent past is helpful:

Mid-2005 saw sales volume peak for all types of real estate in California, with nearly 754,000 homes sold that year;

Nearly 30% fewer sales were recorded in 2006 than in 2005, while sales dropped an additional 30% in 2007;

sales bottomed in 2008 and were artificially inflated in 2009 due to subsidy-induced purchases and speculators jumping on the momentum, but remained 40% below 2005;

2010 saw a decline from the year earlier in both sales volume and prices;

California home sales started off 2019 with a whimper, 12% lower year-to-date as of March. This continues a consistent decline in year-over-year sales volume that began in mid-2018.

Sales volume ended 2018 4.3% below 2017, amounting to 19,900 fewer sales. In contrast, 2017 home sales volume ended the year with just 3,800 more sales than in 2016. This is an increase of less than 1%. The previous year, 2016, also saw a minuscule increase over 2015.

Sales volume is not expected to languish until the years following 2021, due to:

fewer participating first-time homebuyers than normal;

lower homeowner turnover to buy an upgrade or relocate due to continued negative equity and delayed retirement;

reduced home inventory across the state; and

static turnover in rental occupancies.

Much of these disadvantages are due to the jobs recovery which has been dragged out for eight years now, a confidence issue, and is pronounced by wage increases below the rate of consumer inflation. California finally regained all jobs lost in the 2008 recession in mid-2014, but has yet to return to pre-recession employment levels after considering the 1.1 million working-aged population increase. At the current recovery pace this will occur in 2019.

Short sales, real estate owned (REO) property resales and speculators have contributed to sales volume distortion over the past few years. Conventional positive-equity resales by owner-occupants were the exception, sometimes reminiscently called standard sales as opposed to short sales. As prices rise, move-up homeowners will return to the market to sell and concurrently buy a more suitable replacement home.

Further, as of Q3 2017, 3.2% of California mortgaged homeowners were still underwater. Thus, turnover by this chunk of owners is restricted. These homeowners cannot sell and relocate to purchase another home because their homes are worth less than the debt encumbering them. To rid themselves of the home and the debt, they have to endure damaged credit resulting from a short sale or foreclosure. The desire to avoid this embarrassment takes most of these 3.2% homeowners out of the home buying market for years.

Home sales in the coming years

The forward trend in California home sales is mixed for both buyers and seller. Homebuyer income is going further and doing more than anytime during the past 15 years due to increased borrowing capacity brought on by low interest rates (even though they rose mid-2013 to cut back funding by 10% from one year prior, but dropped to fuel sales in 2015). In fact, the Buyer Purchasing Power Index (BPPI) went negative in June 2013 and bounced back to zero in September 2014 – this momentarily stalled home price expectations.

In December 2015, the Federal Reserve (the Fed) committed itself to raise short-term interest rates in order to keep a lid on the recovery (as they did in both 1984 and 1994 midway through those recoveries). This upward rate move by the Fed (and the bond market) will instantly be reflected in ARM rates, and eventually trickle into higher mortgage rates, likely around mid-2016. Higher FRM rates will promptly trend real estate sales volume down and some 9-12 months beyond prices will slip. As prices start to decrease, expect the short-term rate to decline in the 2017-2018 period which will slow and put an end any downward turn in real estate sales volume and the economy.

first tuesday forecasts home sales volume will return to 2006 levels around 2020-2021. The peak sales volume last seen in 2004, inflated by speculator acquisitions and excessive mortgage money, is unlikely to return for decades, when interest rates cyclically peak.

Relocating Baby Boomers going into retirement later this decade will be the primary propelling force in both selling homes and buying replacements beginning around 2019. Their Generation Y (Gen Y) children will add to the sales volume at the same time as they find jobs at better pay levels and become first-time homebuyers. Gen Y influence will peak in sales volume at the end of this decade as they complete their shift from renting to owning.

Once Californians feel the effects of two or three years of healthy employment growth, their confidence about the future will improve. They will once again be willing to invest in the economy since the expectations for tomorrow are projections based on yesterday’s most recent experience. Only then will occupying homebuyers – end users – return in sufficient numbers for sales volume to swell significantly.

In 2018, sales volume will begin to pick up in earnest, peaking in 2019-2021. Employment and labor force participation will have reached beyond its 2007 peak, and grow quickly. Then, California will once again see home prices jump beyond the rate of consumer inflation. Mortgage lenders with an eye for excess profits will then begin to loosen their lending standards to whatever extent federal regulators permit or lawyers divine. The memory of the grim mid-2000s will be politely pushed aside, and mistakes will be repeated by all participants – lenders, builders, brokers and buyers.

Favorable market conditions now at work

Several favorable market factors currently support increasing sales volume:

A steady 3% annual increase in the number of new jobs;

A more reasonable (though still rising) price trend as we start 2016;

Slowly rising consumer confidence and spending; and

the recapitalization of the private mortgage insurers to eventually replace (or fully compete with) government guarantees of home mortgages.

Trends to be concerned about

However, many unfavorable market conditions restrain the rise of home sales volume:

the weakest homebuyer demographics in 15 years;

failed savings for a down paymentas high rents squeeze potential first-time homebuyers out of saving;

buyer borrowing power no longer enlarging the funds they can borrow as interest rates inevitably rise, reducing funding for purchase-assist financing and dampening property prices;

the public’s increasingly anti-business and pessimistic attitude about American economics, wealth inequality and national politics no matter the outcomes; and

The competitive broker

What’s a broker to do until home sales volume takes off?

SFR brokers and agents might consider adding SFR-related services to supplement their income. Those who do add related services will restructure their practice as “all-service brokers.” Transaction-related services will be integrated into their office operations to maintain solvency and grow.

These services include:

escrowing their in-house transactions under the broker’s license;

entering into or expanding property management services;

negotiating equity purchases for investors from underwater owners on the chance of a short sale discount or who have a positive equity;

specializing in sales and leasing of a particular type of commercial property, other branch office locations and alternative marketing approaches (aside from social media);

arranging carryback financing and the take over/assumption of existing mortgages, and buying and selling those carryback trust deed notes;

negotiating options to buy, or lease with option to buy when inventories expand as the shadow inventory of speculators returns to be sold;

exchanging properties with equity to help owners relocate their wealth held in real estate tax free; or

using barter credits in lieu of greenbacks, etc.

Prudent brokers will insist their prospective buyers commit to exclusive representations by the broker and agent to locate a home (or other property). By signing an exclusive right-to-buy listing agreement, buyers commit to employ brokers and agents just as sellers commit to employ brokers and agents, the obverse side of the same employment coin. This will ensure time spent with a buyer produces a closing and a fee.

Causes for the rise and fall

The trend in California home sales during the initial years of the 2010s remains grim for sellers. Not so for buyers. Homebuyers’ dollars are going further than anytime during the past 15 years.

Sales now and into 2014 will remain excessively lender-driven and speculator-riddled, but will be easily predictable for SFR agents and their brokers. The center of this action is the multiple listing service (MLS).

To set the stage for a forward look, a review of sales volume in the recent past is needed:

Mid-2005 saw sales volume peak for all types of real estate in California;

Early 2006 produced both the peak in sales prices and the initial precipitous decline in sales volume. Nearly 30% fewer sales were recorded in 2006 than in 2005;

In 2007 sales volume dropped another 30%;

2009 sales were artificially higher than anticipated due to subsidy-induced purchases and speculators, but remained 40% below the 2005 peak year;

2010 saw a decline from the year earlier in both sales volume and prices;

2011 increased slightly in sales volume while decreasing in sales prices; and

Real estate owned property (REO) resales and speculators have contributed to sales volume oddities over the past few years. Conventional positive equity sales remain the exception.

Lenders have turned increasingly to short sales in 2012, surpassing the number of foreclosures in California. Short sales will continue to make up roughly one-fourth of the home resale market in 2013.

Going into 2013, sales volume is gradually recovering as speculators begin to exit the market, making room for buyer-occupants.

The bounce loses energy and hunts for the floor

Sales volume will likely increase by 10% in 2013, due to slowly improving confidence and job numbers. Anticipate modest price increases to follow in 2014, falling back in 2016.

In 2015, the Federal Reserve (the Fed) will need to raise short-term interest rates in order to keep a lid on the recovery (as they did in both 1984 and 1994). Expect the short-term rate to decline within one year, the 2016 period, at the end of a downward turn in real estate sales volume.

Sales volume’s next big peak will occur in 2019-2020, with pricing following 12 months later.

For home sales volume to achieve the kind of dramatic but stable recovery which took place in the 1996 period following the 1990s real estate recession, employment will need to increase at the rates experienced in the mid-1990s: 350,000+ additional jobs created annually for three years. California’s labor force is inching back to that number, as a total of 700,400 jobs have been gained since employment was at its lowest in January 2010. However, as of October 2012, California is still 900,000 jobs short of the employment level before the Great Recession.

Once Californians feel the effects of two or three years of healthy employment growth, their confidence about the future will improve. They will once again be willing to invest in the economy. Only then will end users return in sufficient numbers for sales volume to swell.

In 2017, sales volume will begin to pick up significantly, peaking in 2019-2020. Employment will have reached its 2007 peak, and will continue to grow quickly. 2017 will see home prices jump well beyond the rate of consumer inflation.Mortgage lenders with an eye for profits will then begin to loosen their lending standards to whatever extent federal regulators permit. The memory of the grim mid-2000s will be quickly pushed aside, and mistakes will be repeated.

Factors leading to recovery

Beginning in 2016-2017, another wave of investors and an upsurge of household formations by first-time homebuyers, will kick-start sales volume. In turn, this will drive pricing momentum upward once again. Keep your eyes on homebuyer demand (not sellers, median prices or the MLS inventory). Real demand is driven by:

Favorable market conditions now at work

Many favorable market factors are currently support increasing sales volume:

a slow (but steady) increase in the number of new jobs;

direct lender subsidies from the federal government for loan modifications on upside-down mortgages;

much lower high-tier home prices (as well as more price declines in low- and mid-tier homes), stabilizing in 2013;

no major increase in new housing starts into 2014 beyond 10-12% annually;

increased short sales;

slowly rising consumer confidence and spending; and

the recapitalization of the private mortgage insurers to eventually replace government guarantees of home mortgages.

Trends to be concerned about

However, many unfavorable market conditions restrain the rise of home sales volume:

deflationary pressure on consumer and real estate prices (labor, materials and the price of land have become less expensive);

the high level of underwater homeowners in California, who will not collectively reach solvency until 2025;

the weakest homebuyer demographics in 15 years;

the public’s increasingly anti-business and pessimistic attitude about American economics; and

tightened loan standards as lenders are forced to apply the forgotten fundamentals of sound mortgage lending practices (20% down payment on all non-FHA loans, lower income ratios, risk-free credit scores and full documentation of income and funds).

The competitive broker

What’s a broker to do until home sales volume takes off?

SFR brokers and agents can consider adding SFR-related services to supplement their income. Those that do add related services will restructure their practice as all-service brokers. Transaction-related services will be integrated into their office operations to remain solvent and grow.

arranging carryback financing and loan assumptions, and buying and selling those carrybacks;

negotiating options to buy;

exchanging properties with equities to help owners relocate their wealth held in real estate; or

using barter credits in lieu of greenbacks, etc.

Brokers can also insist that prospective buyers commit to exclusive representations by a broker and agent to locate a home (or other property). By signing an exclusive right-to-buy listing agreement, buyers are asked to employ brokers and agents just as sellers are asked to employ listing agents. This will ensure time spent with a buyer produces a closing and a fee.

87 Comments

Inventory is climbing, but very slowly because California makes it SO hard and SO expensive. The permit fees, the school fees and their processes are not reasonable. They make it so hard for contractors to turn a profit because they want it all. It’s very discouraging and demoralizing to many small and mid-sized residential builders. In some cases they want nearly twice the value of a given lot, just in permit fees. So a guy might look at a lot, and think… okay, that lot is probably worth $150k, building costs, escrow/title, etc…, and they might think they can turn a reasonable profit for their time and risk. But wait… then the government comes in and tells them they want upwards of $60,000 or more…. there goes all of the builder’s profit and there goes another house that CA needs. Instead of worrying about rent control, I cannot understand why CA doesn’t just make it easier and more affordable… they already get so much in property taxes. Why do they have to take so much from each house BEFORE it even gets built. Very exasperating….

You really have to wonder with all the aggressive lending 5-percent down up to $2.5 million, second mortgages making a come back at higher loan to values, and no tax returns loans down to 500 credit scores that when sales volume decreases it’s an ominous sign.

klesb Mike, you have identified the problem well. Democrats in government are anxiously trying to apply their economic theories to issues that require market based solutions... – Los Angeles rental crisis continues in 2019

Featured Comment

Zestimates are great conversation starters with sellers and buyers. Zillow has done more for our bottom line than NAR ever has or will. Don’t fight the current of the river, learn to run with it. Disruption is inevitable in any industry that is fragmented or inefficient. Granted, it does feel like armchair experts and platforms are plentiful in real estate these days, but when the tide rolls out we will see the value proposition of the truest professionals in this industry shine once again.